Brands have experienced the pressure to come up with promotional plans especially when a category relies on competitive promotions or having to look at realigning prices within a category.
The importance of planning before offering discounts along with understanding how these discounts affect your margin and sales goals are crucial. In this article, we are going to look at how price adjustments play into your margin.
In this first example, we look at the scenario of a standard deduction in pricing. The question from a gross margin standpoint is: How much will I have to increase my volume of sales in order to maintain the same gross profit?
Your current gross margin is at 25% and you offer a 10% price deduction. You will need to increase your volume in sales by 67%.
25-10=15, 10/15=0.06666 X 100= 66.7%
In a second scenario let’s suppose instead of taking a price decrease you decide to raise prices. The question to ask is: How much fewer in sales can I have in order to maintain the same gross profit?
Your current gross margin is 25% and you increase your price by 5%. You can sell 17% fewer in sales in order to maintain the same gross profit.
25+5=30, 5/30=0.1666 X 100= 16.66%
As you may already know without doing the math, if we plug in a higher current margin let’s say 50% you will find that the market favors higher margins. Using the first example above a current margin of 50% with a 10% price reduction means that now you will need to increase your volume in sales by 25%. Likewise, if you increase prices and your current margin is at 50% and you increase prices by 5% you now can sell 9% fewer in sales in order to maintain the same gross profit.
So, when we are looking at price changes and knowing we are dealing with the three elements of sales price, COGS and gross profit remember that our sales price is what is being changed in the equation, therefore, changing our gross profit percentage.